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The Lloyds share price is falling on Brexit woes. Is it time to sell?

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 It isn’t nice to start the day and see Lloyds Banking Group (LSE: LLOY) down among the FTSE 100‘s biggest losers. As I’m writing, banks make up three of the bottom four stocks, with only Rolls-Royce doing worse in the bottom spot. NatWest Group is the biggest banking faller on a 6.4% drop, followed by the Lloyds share price down 4.5%. And then Barclays (LSE: BARC) has dipped by 3.9%.

The Bank of England (BoE) has chosen this time for its thoughts on how our banks are coping too. And the prognosis, from the BoE’s latest financial stability report, is upbeat. Most of the no-deal Brexit risks have already been mitigated, it reckons, though we should get some disruption. I don’t see a great deal of threat for Lloyds, which has already refocused on its UK operations.

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The report suggests the banks have sufficient liquidity to absorb up to £200bn in credit losses. But that would be a nightmare scenario needing, for example, 15% unemployment and a 30% crash in house prices. Fate is something I don’t like to tempt, but I can’t see anything close to that happening.

Lloyds share price falling

But the gloom is still hitting banking shares. The Lloyds share price had benefited from the November market spike. But it has now lost 15% since that mini-peak. Barclays is in a similar position, with its shares down 10% since November’s high. So what would I do now?

Well, I’m certainly not going to sell my Lloyds shares. And if I owned Barclays shares, I would not sell those either. In fact, I believe we’re still seeing a top buying opportunity for the banking sector. Valuation measures based on profits are pretty much shot this year, with forecasts suggesting a price-to-earnings ratio of 31 on the current Lloyds share price. That would be madness in normal circumstances, but next year’s forecasts already look a lot brighter.

We’re looking at a 2021 P/E of 11. And by then, analysts expect Lloyds to reinstate its dividend for a yield of 4.4%. It would be significantly below pre-pandemic payouts. But as a new start to a hopefully new progressive policy, I find it attractive.

Banking liquidity healthy

Liquidity, of course, is surely the big issue behind the Lloyds share price outlook. But that looks fine to me. At the Q3 stage at 30 September, Lloyds boasted a CET1 ratio of 15.2%. That’s strong, easily beating the bank’s target of around 12.5%. There’s a loan-to-deposit ratio of 98% too, with also says good things about Lloyds’ liquidity.

At its Q3 point, Barclays managed a CET1 ratio of 14.6%. That’s slightly behind Lloyds, but still healthy enough to dispel any liquidity fears for me. And the bank recorded a year-to-date pre-tax profit of £2.4bn, pointing out that it has been profitable in every quarter. On the P/E front, Barclays looks just as attractive to me as Lloyds. The predicted 2020 P/E stands at 18. But for 2021, when it should be more meaningful, there’s a drop to under 11. The forecast dividend yield stands at around 3.5%.

I’d buy Barclays shares now, and maybe more Lloyds too.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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